Stock markets around the world have swung from despair to exuberance, generating rallies that would have been unimaginable to most investors back in the dark days of last winter. In retrospect, the combination of unprecedented monetary easing, near-zero central bank interest rates, and aggressive fiscal policy stimulus should have been seen as dispelling concerns that the world was on the verge of a 1930s-style depression. Once exaggerated fear lost its grip, hedge funds and proprietary trading desks of big banks took advantage of the chance to finance sizable stock market purchases with ultra-cheap money.
But there was more to it than that. Many professional investors sensed that businesses were responding with unaccustomed speed and vigor to changed circumstances, slashing capital spending budgets and trimming labor costs. That helped spawn the view that profitability would not vanish, notwithstanding the severe worldwide recession.
Several countries stood out as locations where corporations reacted with determination to the challenges. The evidence appears in a recently-published study by the US Bureau of Labor Statistics, BLS, that compares productivity and labor cost developments in 2008 for manufacturing industry in the United States and 16 other major countries.
The facts are remarkable: five of the 17 countries actually showed an improvement in output per hour worked in manufacturing and another six countries were able to keep the deterioration in productivity to less than one percentage point.
The two countries with the best productivity performance were the United States and South Korea. Both achieved gains in productivity in manufacturing of 1.2%. Smaller gains were recorded by Norway, Belgium, and the UK. Unlike Korea, which posted output growth of 3%, US firms managed to improve productivity even with a sizable 2.7% drop in output. They did so by moving swiftly as the economic meltdown unfolded to cut employment by a substantial 3.4%, greater than any of the 16 other major countries. They also lowered compensation to manufacturing workers by 1.0%, sufficient to hold down the increase in unit labor costs to a modest 1.7%.
Japanese manufacturers also demonstrated a tough-minded reaction to the global economic crisis. Output per hour declined by a scant 0.2%, despite a huge 3.4% plunge in manufacturing output. The reason is that Japanese firms were surprisingly quick to reduce employment as demand slumped. The reduction was 1.8%, just behind the Anglo-Saxon trio of the US, the UK, and Canada. Japanese companies were also successful in reducing total compensation and thus limiting the rise in unit labor costs to a manageable 2.0%.
Comparable figures for 2009 won't be available for some time, but statistics for the United States suggest that strong management controls over both capital expenditures and labor input have continued in the teeth of a severe contraction in output.
The US recession is just about over. Industrial production, wholesale and retail sales, and real, inflation-adjusted, incomes have bottomed and are starting to move up. Real GDP is recovering, in large part because the pace of inventory reductions has slowed. Housing markets appear to be reviving, with higher sales and prices.
But employment - another key indicator that experts consider when dating the end of a recession -- is still declining. So it will take a little more time to determine whether an economic recovery has unambiguously commenced.
However, it is worth remembering that merely stopping the economic contraction will not restore a feeling of prosperity among US consumers and most small businesses. No matter how enthusiastic stock markets may get, the sense that the economy is not functioning well will linger for some time. The unemployment rate, a lagging indicator, will probably reach a peak of well above 10% and will stay high for the next two or even three years. Moreover, the feeling that large and powerful business and financial institutions are thriving at the expense of the ordinary worker will persist. The latest Conference Board data on consumer confidence showed a wave of pessimism in the October survey. Only 3.4% of respondents said that "jobs are plentiful", while 49.6% said "jobs are hard to get" - the worst readings since the early 1980s.
The uncomfortable fact is that cost containment is not enough to underwrite a classic economic recovery in which employment and incomes turn sharply higher, consumers spend more freely, profits soar, and stock market values move inexorably higher. A recovery that is based solely on improved productivity won't gain much traction unless workers share in the gains. So far, in the US they haven't yet.
As investors increasingly ponder the implications of that disparity, the great stock market rally of 2009 will be in danger of fizzling out.
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